U.S. adds a much-better-than-expected 272,000 jobs in May, but unemployment rate edges up to 4%

The U.S. economy added far more jobs than expected in May, countering fears of a slowdown in the labor market and likely reducing the Federal Reserve’s impetus to lower interest rates.

Nonfarm payrolls expanded by 272,000 for the month, up from 165,000 in April and well ahead of the Dow Jones consensus estimate for 190,000.

At the same time, the unemployment rate rose to 4%, the first time it has breached that level since January 2022. The increase came even though the labor force participation rate decreased to 62.5%, down 0.2 percentage point. However, the survey of households used to compute the unemployment rate showed that the level of people who reported holding jobs fell by 408,000.

Job gains were concentrated in health care, government and leisure and hospitality, consistent with recent trends. The three sectors respectively added 68,000, 43,000 and 42,000 positions. The three sectors accounted for more than half the gains.

Other significant growth areas came in professional, scientific and technical services (32,000), social assistance (15,000) and retail (13,000).

Regarding wages, average hourly earnings were higher than expected as well, rising 0.4% on the month and 4.1% from a year ago. The respective estimates were for increases of 0.3% and 3.9%.

Stock market futures lost ground while Treasury yields surged following the report.

The report comes with investors on edge over how long the Fed will hold its benchmark borrowing rate at the highest level in some 23 years. In recent weeks, policymakers have indicated a reluctance to cut anytime soon as inflation remains above the central bank’s 2% target.

As things stand, markets are pricing in an initial cut in September followed by one more in December.

The Fed has not lowered rates since the early days of the Covid pandemic in 2020 and hiked 11 times between March 2022 and July 2023. The benchmark federal funds rate is currently targeted between 5.25%-5.5%.

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